December 04, 2015Progressively Building Capacity in Lebanon’s Oil and Gas Sector

As part of the Lebanese Center for Policy Studies’ (LCPS) ongoing effort to monitor Lebanon’s oil and gas sector, LCPS in collaboration with the Lebanese Petroleum Administration (LPA) held a closed roundtable in Beirut on 30 October 2015, titled “Governance and Transparency in the Oil and Gas Sector”. Among those invited to address participants was Dr. Charles McPherson, a consultant focusing on petroleum and mineral policies. In addition to his fifteen years of experience working at two international oil companies, Dr. McPherson previously worked for the IMF Fiscal Affairs Department and was a senior adviser on oil and gas at the World Bank, where he managed the bank’s relationship with the Extractive Industries Transparency Initiative (EITI). LCPS sat down on the sidelines of the roundtable with Dr. McPherson and discussed both the current state of the Lebanese petroleum sector and how good governance in the sector can be maintained and improved.

Considering the complexity of the petroleum sector and the prevalence of high level corruption in Lebanon, how flexible should legislation governing the petroleum sector be in order to both ensure that revenues are not squandered and allow for policy changes to be made as production progresses?

The best strategy is the one that seems to have been adopted. Lebanon’s legislation comprehensively addresses the fundamental issues that make an oil sector governable while still leaving room for their elaboration in the model agreement, which can be changed more easily over time—not retroactively, but in each licensing round whenever some modifications seem appropriate.

In the regulations there is also some flexibility to make changes in response to circumstances that arise in Lebanon. But basically you have set the ground rules out very clearly in the legislation. I would not suggest that, in the kind of environment you have in Lebanon, a lot be left open to negotiation. Ground rules should be outlined as clearly as possible in the umbrella legislation, while leaving details and some flexibility in the agreement itself.

What is your opinion on the LPA releasing all of its recommendations to the public?

Concerning information that is contained in the tender protocol and relative to the scoring that is done by the LPA after that—there is no reason it should not be put into the public domain. There are some things that are commercially sensitive which, in my opinion, should not be made public, but they are few and not currently included as data to be submitted under the tender protocol. For example, detailed geological interpretations and exploration strategies are very sensitive from a company’s point of view and, understandably, they don’t want that information put into the public domain and revealed to competitors.

Lebanon is a ways away from establishing policies on petroleum revenue management and much has been left to be decided at a later date. For instance, the creation of a sovereign wealth fund is mandated in article 3 of law 132, but the specifics of it are to be determined at a later date. When should Lebanon address the issue of revenue management?

How Lebanon should respond to the challenges posed by massive revenues, volatile revenues, revenues that may be exhausted, and revenues that could completely disrupt the national economy through what is termed ‘Dutch Disease’, needs to be thought about and discussed at a very early stage. This doesn’t mean Lebanon immediately needs to set up a fund. You can certainly wait and see whether there is the kind of natural resource that justifies setting up a fund. The fund is just part of a larger strategy of public financial management, budgetary discipline, revenue forecasting, macroeconomic planning, etc.. One thing that is often talked about in the context of funds is that a fund might provide a little more integrity and a little more transparency than an existing system of public financial management (PFM). The standard response to this suggestion is: “Fix your public financial management system and you won’t need a fund.” It’s not always all that easy. Some people do say setting up a fund might offer an opportunity to introduce the discipline, transparency, etc., that can be the leading edge to overall PFM reform. If you do the fund route, it is necessary to ensure integration of the decisions made in respect to the fund with other public financial, budgetary, and asset management regimes.

There is a common perception that Lebanon’s institutions are not strong enough to deal with an influx of petroleum revenues. Some argue that not extracting Lebanon’s potential petroleum reserves could be an advantageous course of action, seeing as revenues could be squandered as many of those institutions that will be involved in the petroleum file do not operate in a sound manner. But you also spoke about the prospect of “missing the boat”, missing out on capitalizing on a resource. In the case of Lebanon, what is your assessment of these two positions?

I think it’s extremely important to move forward now and I do think Lebanon can do that with the institutions in place. Even if Lebanon were to hold a licensing round right now, there would still be quite a few years before anything really starts to happen, assuming commercial success. That gives extra years to build capacity, not just in the LPA, but also in the other agencies and ministries which are going to be important to this whole process. The Ministry of Finance, Ministry of Economy, and the Ministry of Environment will have time to build expertise. Lebanon doesn’t need to have a full-blown set of skills and expertise from the outset. You need to set priorities and focus on gradually building the staffing and skills required to address the most urgent issues that are likely going to come up as you go through the different phases of petroleum operations—from exploration, to development, to production, and so on.

But Lebanon is not moving ahead with operations and I suspect that is not because the Council of Ministers decided it is wise to leave all these resources in the ground. In any other country I would say that it’s a nonstarter to suggest that found resources be left in the ground. As you point out, one hears recommendations along these lines linked to the risks associated with petroleum development in a context of institutional weakness, but once the public is aware that you have potentially very significant resources that can make a major contribution to society and the economy, they are not likely to stand for delays.

The potential for Lebanon “missing the boat” in a big way is absolutely there because neighboring countries have made gas discoveries, and with the recently announced mega gas find in Egypt there is the possibility that integrated regional development plans may get underway. It would be a shame if Lebanon were to miss out on this.

Recently, there has been a lot of debate in Lebanon about the establishment of a national oil company (NOC). Should a country like Lebanon have an NOC?

The idea of an NOC is almost irresistible but it is of critical importance to be very clear on what the country wants from it and to understand the systemic risks that experience has shown to be associated with NOCs. You have to ask whether an NOC can deliver on the objectives laid out for it.
Some of the objectives could be revenues, acquiring technology, or building national capacity, among others. Are there other ways of delivering on those objectives without an NOC? I raise that question because going the NOC route is fraught with issues related to corruption, conflicting mandates, and taking on governmental obligations that have nothing to do with the commercial behavior of a company.

There are alternatives. For instance, an efficient fiscal regime can produce revenues. Efficient operations can be guaranteed by selecting the right kinds of companies to work with Lebanon, such as private sector companies whose track records show that they can really do the job. That means you don’t spend public funds or put public funds at risk, and that public funds are not taken away from other urgent budgetary priorities and directed toward an NOC. There is a need an extensive debate on the pluses and minuses of NOCS.

The final serious risk posed by NOCs is they are far too often captured by political and commercial elites whose primary interest lies in advancing their own agendas rather than furthering the public interest. NOCs handle significant financial resources and are a central part of the economy. As a consequence, they are a natural target for control by elites and corruption. If Lebanon does go ahead with an NOC, provisions for oversight, transparent operations, and accountability will be critical to success.